Tax Due Diligence in M&A Transactions

Tax obligations for companies are more than simply paying income tax. When it comes to M&A doing tax due diligence is a crucial step in determining what obligations and liabilities are present for the company you’re looking to acquire.

Tax due diligence may differ in accordance with the size and nature of the business being targeted and the scope and nature of the transaction. It may include an investigation into the foreign reporting forms, previous audits or objections as well as related third-party transactions. It could also include an examination of state and local tax laws (e.g. sales and use taxes, as well as property taxes; unclaimed property statutes ensuring deal success with VDR’s meticulous document organization and misclassification of employees as independent contractor).

While it is easy to focus on the complex federal tax laws, state and local taxes can be substantial and have significant impact on a company’s financial health. A company’s reputation can also be damaged if it’s believed to be a tax-evader. This could be very difficult to recover from.

In most cases, when a return is prepared, it’s expected that the person who prepared the return sign the return under penalty of perjury, affirming that the return is truthful and accurate to the best of their knowledge and belief. A recent ruling suggests that the IRS may go beyond this standard when determining whether the preparer used reasonable care in preparing a tax return.

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